Stop Enabling Fraudulent Activity in Your Community
Unfortunately, community associations—regardless of how well they are run—can fall prey to embezzlement or purposeful misuse of funds or resources. Association managers and board members should be aware of common ways that fraud is perpetrated and how to prevent—or in the worst case scenario, deal with—this white-collar crime, which has the potential to happen on two levels: the management company or the board.
A lack of segregation of duties can lead to a property manager’s ability to steal from the association. Typically, in those types of cases, a property manager is performing all of the functions that should be split among several people. Vendor favoritism is a common form of fraudulent activity. So evaluate whether a proposed vendor really is the best, or whether it seems that there is some sort of side arrangement. Getting three competitive bids is one way around that problem.
Fraudulent activity by board members is more common than management fraud, although there has been a steep decrease in this in recent years as property managers have been doing a better job of controlling boards. Expense fraud is the most common fraud variation to watch out for, as board members could be using debit/credit cards for personal use, or engaging in conflicts of interest with vendors, most notably in the form of kickbacks, or accepting free services such as house painting. While it’s easier to stop one person, especially if he’s careless in the way he engages in fraudulent activity, collusion among board members who can cover each others’ tracks is much more difficult to discover and prevent.
For short-term and long-term solutions and a certified public accountant’s advice on how to stamp out underhanded dealings in the community you manage, see “Put Plan in Place to Prevent and Deal with Fraud,” available to subscribers here.